When I brought up SuperValu (SVU) as a potential value investment a few years ago, many of you warned me against it. I wish I had listened! The grocer got squeezed on all fronts, including but not limited to: food inflation, competition, and perhaps most importantly, debt.
Given time, most problems facing a company can be handled. Food inflation hurting margins? Wait it out; figure out where you can pass on costs and where you can't; shift consumers to private label "value" products. Getting beat up by the competition? Figure out what they're doing well and copy them and close unprofitable stores.
But many of these options disappear when a company is carrying a load of debt. Shrinking down can put a company in a worse position, as the large debt burden is spread over fewer revenues. What would otherwise be temporary problems can threaten bankruptcy when financial obligations come due. Finally, a company can't spend what it needs to in order to keep up with the competition (stores get old, systems outdated etc.), which can push the company into a negative feedback cycle.
It is likely that SuperValu suffered through all of these problems as a result of its debt position. My inability to recognize this ahead of time ended up costing me. I generally stay away from levered companies; for various reasons (stability of grocery business, SuperValu's traditionally strong locations and local economies of scale, diversity of businesses/platforms), I ignored that instinct invested in SVU. Unfortunately, as the quarters wore on, sales continued to deteriorate with massive impacts on the bottom line thanks to the fixed costs of leverage.
Frankly, I'm quite happy to have been able to escape from this company at above $4/share. If there hadn't been interest in a buyout, I think this situation could have ended up a lot worse for investors. The standalone company that remains after the buyout of various assets looks just as risky, while the revenue situation continues to deteriorate. It's certainly possible new management can turn this ship around; I just have no intention of putting levered money on it! Count this one as the newest member of the Value Fail page.
Disclosure: No position